The 'Report of the Advisory Group on Fiscal Transparency' released today by the Reserve Bank of India (RBI) has recommended that basic principles of budget management should be incorporated in the general budget by the union government by amplifying the scope of the 'Fiscal Responsibility and Budget Management Bill (FRBMB)'. It has further pushed for open budget preparation, execution and reporting.

'Although the scope of the budget has been defined by the Constitution and clear budget procedures have evolved over time, we do not have a general budget system law," the group said. It added that essential elements of a budget law should have constitutional or near constitutional status.

The group, which was headed by Member of Planning Commission, Montek Singh Ahluwalia, said that there was no quantification at present of the fiscal risks to which the budget is subject.

To tackle this lacuna it recommended that a start should be made in presenting such an assessment based on the uncertainties inherent in the basic macro-economic projections and other identifiable uncertainties (such as the likely realisation from privatisation).

The absence of data on forward projections is a major weakness and an impediment to any effort to assess fiscal sustainability. Global best practice requires projections for 5-10 years ahead, but it is not feasible in Indian conditions.

However, a projection of major categories of expenditure and revenue two years ahead is feasible and should be implemented in the budget for 2002-03 irrespective of whether the FRBMB is passed by then.

The budget documents at present do not provide sufficient indication of how the annual budget fits with the government's long-term deficit and debt targets, the group said and added that it does not, therefore, provide the basis for an assessment for fiscal sustainability.

The FMBMB will address this issue by requiring the Centre to lay before Parliament a medium term fiscal policy statement which is expected to contain an explicit three year rolling target for prescribed fiscal indicators.

While budget documents indicate the Centre's fiscal deficit, no information is provided at present on the overall public sector balance taking account of the deficit of central non-financial public sector enterprises.

To rectify this situation the group has recommended that a start be made by providing this information at the time of budget presentation because individual public sector entities have financing plans on the basis of which central plan outlays are calculated.

It has recommended a review of the current policy on disclosure of contingent liabilities with the objective of moving to fuller disclosure. Revenue loss from major existing and all new tax concessions as well as the basis of debt reporting at market exchange rate should be disclosed.

The current fiscal practices at the central government level satisfy the minimum requirements of the International Monetary Fund's 'Code of Good Practices on Fiscal Transparency' in many areas though there are deficiencies in some important areas, many of those would be addressed once the FRBMB is enacted, the advisory group said. It added that the position at the state government level in this regard is much less satisfactory.

The advisory group says that the issue of transparency in tax laws is an area of concern. "Although the principle that tax must be levied on the basis of explicit legal authority is strictly complied with, our tax laws are lacking in transparency. The complexity of the tax structure, especially the large number of exemptions, create room for uncertainty and administrative discretion," it said.

Administrative procedures are archaic and involve direct interaction between the assessee and the tax administrator. This creates the possibility of a case by case determination of tax liability.

To correct this situation, the group pointed out that a major effort at simplification and greater use of information technology, especially electronic filing was urgently needed.